While leaving your credit card bill unpaid isn’t ideal, Singaporeans can still minimise debt with these simple steps.
First published on 19 March 2016. Last updated on 23 February 2017.
Whether it’s because of a period of financial difficulty or an emergency expense, missing a credit card payment happens to the best of us. When you can’t afford to pay your balance in full, the worst thing you can do is to leave your bill unpaid.
However, ignoring your bill won’t make it go away. The longer you leave your credit card balance unpaid, the more you accumulate in fees and interest. Averaging around 25% per annum, credit card interest rates can make it easy for debts to snowball to an amount you can’t manage.
Here’s a breakdown of what you can do in case you can’t pay your credit cards.
First, An Important Note on Making Full Repayments
Credit cards are not designed for long-term loans. The interest rate is high (around 25% per annum), so you should consider personal loans instead if you need to borrow.
SingSaver.com.sg recommends that you use credit cards as a mode of payment only. In other words, use your credit card to purchase things for rewards and discounts, but pay it in full so there is no interest charged. Do not let paying your credit card bill late become a habit.
Check if You Can at Least Make the Minimum Repayment
Even if you do not want to pay in full, there is a minimum amount you must repay. Failing to do so will damage your credit rating, and will incur additional late fees.
Most credit cards have a minimum repayment of $50 or 3% of the outstanding loan, whichever is higher. If you can afford to pay this, do so promptly. If for some reason you cannot make the minimum repayment, call your bank and inform them in advance. You may be able to work out an alternative date on which to pay them.
Make a Balance Transfer as Soon as Possible
A balance transfer occurs when you pay your credit card debt with a low or zero rate interest loan.
For example, say you owe $5,000 on your credit card, but you cannot afford to pay $5,000 in full. You also estimate that it will take you three to four months to pay the $5,000 (not counting interest).
Rather than leave your debt to snowball, you could shift the debt onto a credit card with a 0% per annum interest balance transfer. While you will still owe $5,000, you now have extra time (normally up to six months) to slowly pay off the loan without accruing interest.
Note that you should refrain from using more credit after a balance transfer. Focus on paying down your debt, before any using credit cards again.
If You Cannot Make a Balance Transfer, Consider Using a Personal Instalment Loan
Most personal instalment loans have an interest rate of 6% per annum to 8% per annum. During promotional offers, you may also find personal loans with 0% per annum interest (usually for a limited time, such as the first three months).
If you cannot make a balance transfer, you might consider taking a personal instalment loan to pay off your credit card debt. This will work the same way as a balance transfer – the main difference is that you have to make fixed repayment for personal instalment loans.
If you try to pay the full amount before the loan tenure (e.g. you take a loan for one year but try to rush full payment after four months), you may be charged a prepayment penalty.
Get a Debt Consolidation Plan If You Owe 12 Times Your Monthly Income
If you have maxed out multiple credit cards and owe at least 12 times your monthly income, you need to pay it off as soon as possible. The longer you wait, the more your debt will accumulate and the harder it will be to pay it off.
In this particular situation, a debt consolidation plan (DCP) can help you pay your outstanding balances from multiple credit cards. This is the process of using a single loan to pay off all your unsecured debts. For example, you have a monthly salary of S$3,000, and owe S$500 on one credit card, S$7,000 on a second credit card, S$3,000 on a third credit card, and S$30,000 on a fourth card.
Since a personal loan will only lend you up to 7 times your monthly income, you will not be able to take one to pay off these debts. But when you get a DCP, the issuing bank gives you a single loan for S$40,500 for all your outstanding debts. Then you repay the bank and manage just one loan, instead of trying to juggle all the others.
Besides simplifying your debt management, a DCP also comes with a lower interest rate and a longer payment period. This saves you money on interest and makes monthly payments more affordable, compared to trying to pay your debts without a DCP. The table below illustrates how much you can save on monthly payments if you use Citi’s Debt Consolidation Plan, at tenure of 7 years.
|Current Payment||Citi Debt Consolidation Plan|
|Total monthly repayment||S$1,249||S$682.86|
|Interest rate||Approximately 25% per annum per credit card||10.5% per annum for 7 years|
|Amount saved with Citi Debt Consolidation Plan||S$566.14 or 45.33%|
These figures have been simplified for illustrative purposes. Actual figures may vary.
Citi’s debt consolidation plan can combine all these loans and give you up to 7 years to pay for everything, at an EIR of 10.5% per annum. With this rate and tenure, you can lower your monthly payments to S$682.86, which gives you an extra S$566.14 a month for savings or other expenses.
Besides saving money on lower interest, Citi’s Debt Consolidation Plan also comes with complimentary protection insurance coverage of the borrower’s outstanding balances under the debt consolidation plan, up to S$160,000.
The benefit under the policy will be paid out in the event of the borrower’s Accidental Death, Total Permanent Disablement or Involuntary Employment Disruption (each as defined in the policy document). This means that in case of the borrower’s Accidental Death or Total Permanent Disablement the insurer will pay to Citi the outstanding amount owing by the borrower to Citi under the debt consolidation plan at the time, up to a maximum of S$160,000.
In the case of Involuntary Employment Disruption, the insurer will pay Citi the minimum payment due and payable by the borrower to Citi, as set out in the statement of account for the Debt Consolidation Plan issued to the borrower every month, for up to a maximum of 6 months.
Avoid Using Credit Until Your Debt is Fully Paid
The solutions we’ve outlined should help you clear your outstanding balances as soon as possible. However, you need to avoid adding to your credit card debt for these methods to work. So keep your credit card locked in a drawer until your balance has been fully paid. (In case you choose to get a DCP, all your existing credit facilities will be automatically closed until your outstanding debt is less than 8 times your monthly salary.)
Managing credit card debt is a matter of forming a plan and having the discipline to execute it. By tackling your high-interest debts with these methods, your progress grows with each cleared debt, which gives you more funds to save for a rainy day or reach other financial goals.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.